CEOs Optimistic About 2004 Outlook

Industry CEOs voiced uncharacteristic bullishness about their companies’ prospects for the coming year earlier this week during a panel discussion at the Satellite 2004 conference’s one-day financial forum at the Washington (D.C.) Convention Center.

The unexpectedly upbeat forecast by top officers of three satellite organizations planning broadband service rollouts, both U.S. satellite radio companies and other industry leaders suggests that the doldrums of the past few years may be on the wane. Reasons for optimism included new broadband services, increased demand for other niche applications and the availability of financing to fuel growth.

Dean Olmstead, president and CEO of SES Americom, rated the outlook at “nine” on a scale of 10 due to the advent of promising new services, an improving economy that is beginning to click on “all cylinders” and the company’s expected double-digit revenue growth. His robust view of the next year comes despite industry “overcapacity” in the fixed satellite services (FSS) sector.

One example of a new service that could spur SES Americom’s revenue growth is Connexion by Boeing’s in-flight broadband that will use the satellite operator’s capacity, Olmstead says. SES Americom also is working with ARINC, another proposed provider of in-flight communications, he adds.

“The paradigm has fully shifted,” says Olmstead, who described the swing from relying on traditional revenue streams to seizing new market opportunities.

Olmstead also speaks positively about the company’s plans for broadband and its fledging relationship with satellite TV services provider EchoStar Communications [DISH]. “The collaboration is really essential to take residential broadband into the marketplace with a video bundle,” he says.

Larry Boisvert, president and CEO of Telesat Canada, also is championing a fledging broadband service. That service is to be rolled out in Canada this September, after a likely second-quarter launch of a Boeing-built satellite, Telesat’s Anik F2, by Arianespace, he adds.

“Boeing and Arianespace literally hold the future of Telesat in their hands,” Boisvert says. In addition, a hardware supplier for the Ka-band broadband service will be named in short order, he adds. Roughly 500,000 terminals could be ordered and priced at less than $500 each. The service would be aimed at Canadians who live in rural areas, where cable- modem and DSL capabilities commonly found in big cities are not available.

Canadian Connectivity

Telesat Canada, a wholly owned subsidiary of Canada’s largest communications company, BCE, owns and operates satellites serving the Americas while providing a wide range of consulting services. It posted 2003 revenue of 5 percent more than its 2002 performance as well as boosting net earnings applicable to common shares by 30 percent year-over-year, Boisvert says.

Bob Phillips, CEO of the National Rural Telecommunications Cooperative (NRTC), says his organization plans to sell each terminal for $299.

In contrast, Olmstead says SES Americom would price its terminal equipment in the $500 range to avoid subsidies that would cause it to take a loss. Residential broadband terminals need to be half that price, he adds. He also directly questioned the NRTC’s pricing policy and whether it could make money with its approach of selling the equipment at a loss.

Phillips countered that NRTC is looking to seed the market with customers. He further explained that the NRTC successfully helped to launch the DirecTV business, and that the partnership between them became wildly profitable for both. Finally, he explained that the key cost was not the terminal but the space segment.

Radio Waves

The uncertainty about the long-term staying power of satellite radio in the United States seems to be fading fast roughly one year after the current service providers restructured their finances. Sirius Satellite Radio [SIRI] and XM Satellite Radio [XMSR] are on target to reach cashflow break-even next year; however, they will not do it with broadband services.

Joe Clayton, president and CEO of Sirius Satellite Radio, says he did not anticipate offering broadband but he foresees the eventual rollout of such personalized data services as the scores of one’s favorite sports teams and the prices of a listener’s stocks.

Other in-vehicle services that would be introduced by Sirius include backseat video entertainment as well as a feature to lock and unlock car doors on one’s vehicles. “I see a lot of upside,” Clayton says.

Further optimism for Sirius is spurred by its ability to raise new financing during the past year. The company successfully conducted four 2003 fundraising initiatives, Clayton says, and the outlook for satellite radio during the next year is “nine” on a scale of 10, he projects.

Hugh Panero, president and CEO of XM Satellite Radio [XMSR], says it was quite an endorsement of the satellite radio sector when both his company and Sirius were able to raise money from equity investors during the “worst of times.” In January, XM sold seven million primary shares in the public market for net proceeds of $177 million. XM will use the money to retire a $89 million convertible note to General Motors [GM]. That note was convertible into approximately five million shares of common stock.

In addition, XM took steps to trim its cost of financing by $7 million in future interest payments by calling its 7.75-percent convertible notes due 2006 on March 3 – the first possible call date for those debt instruments. Conversion or retirement of the notes is estimated to eliminate approximately $46 million of debt.

XM’s big challenge now is to manage its brisk growth effectively, after amassing more than 1.3 million subscribers by year-end 2003 following its commercial launch during September 2001, Panero says.

XM also is developing in-vehicle video services, last week introducing a new local traffic and weather service that will serve 21 major metropolitan markets plus several interstate corridors nationwide. Sirius also is rolling out a local traffic and weather data service of its own.